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Online-only Boohoo grows fast and bids on Nasty Gal

(Bloomberg)—Many investors in retail stocks will be happy to see the back of 2016. But not those who bet on web-only Boohoo.com Plc, No. 166 in the Internet Retailer 2016 Europe 500.

The online fashion merchant’s shares have soared about 260% in 2016 as fashion-conscious youngsters snapped up garments such as bomber jackets and shoulder dresses for 15 pounds ($18.42) apiece. The stock’s rise is the biggest of any western European consumer-related company with a market capitalization of more than $500 million, in a year when shares of many retailers are underperforming the broader market. Boohoo had an Internet Retailer-estimated $155.0 million in online sales in 2015, up 15.3% from $134.4 million in 2014, according to Top500Guide.com.

On Wednesday, Boohoo announced plans to acquire the brand and customer databases of Nasty Gal Inc., the Los Angeles-based women’s fashion e-retailer that filed for bankruptcy protection in November. In the proposed acquisition documents, Boohoo deposited $3 million to secure its status as the "stalking horse" bidder. The deposit will be refundable if Nasty Gal receives higher or more favorable offers during the auction process. Nasty Gal is No. 98 in the Internet Retailer 2016 Top 500 Guide with an Internet Retailer-estimated $384.0 million in 2015 web sales, according to Top500Guide.com.

Boohoo, based in Manchester, England, draws inspiration from Zara’s industry-leading speed of design—then makes it even faster. After ordering a broad range of products in small quantities, over half of which are made in the U.K., Boohoo puts them on sale and orders more of the ones that sell and stops buying those that don’t.

“Youngsters now will decide on Thursday what they want to wear on their Friday night out,” company chairman Peter Williams said. “Our test-and-repeat model means we can put what they want in front of them very quickly and get it shipped out for the next day.”

Boohoo’s clothes and prices are targeted squarely at 16-to-24-year-olds. By only selling online rather than having to ship goods to stores, Boohoo can more quickly collect data on what products are hot and which are not. Lead times are between one and two weeks, more than twice as fast as Zara, which is owned by Inditex Group (No. 50 in the Europe 500), according to Simon Bowler, an analyst at Exane BNP Paribas.

“This is taking the world-leading clothing model, and not only replicating it but improving it,” Bowler said by email. “In a week, they launch the number of ranges that other retailers would launch in a season.”

The model is the brainchild of co-founders and CEOs Mahmud Kamani and Carol Kane. The fashion industry veterans have spent their respective careers supplying the likes of fast-fashion pioneer Primark and Sir Philip Green’s TopShop, part of Arcadia Group Ltd. (No. 64 in the Europe 500).

Boohoo’s stock price gain is all the more startling given it operates in a struggling industry. Typically stellar performers such as apparel retailer Next Plc (No. 12 in the Europe 500) have suffered sales declines, while internationally Hennes & Mauritz AB’s profits are down and American Apparel has filed for bankruptcy. H&M is No. 77 in the Europe 500 and American Apparel is No. 338 in the Top 500.

In addition to the success of its sourcing model, Boohoo’s stellar year hasn’t been derailed by the sharp fall in sterling since Britain voted to leave the European Union. As well as purchasing much of its garments in pounds, the company makes about a third of its total revenue overseas. Still, much of the good news might be priced in to the stock, which sells for 60 times estimated earnings for the next 12 months. That’s more than double the valuation of a year ago, and is the highest among the 35 publicly traded companies in Bloomberg Intelligence’s Europe Specialty Apparel Stores Competitive Peer Group.

With the memory of a 2015 profit warning still fresh in his mind, Williams is refusing to get carried away.

“It’s difficult to predict what will happen next year," the chairman said. “But it’s an exciting time.”